Pacific Biosciences of California, Inc. Price & Performance (PACB)

Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call. A copy of which is available on the Investors section of our website at www.pacb.com or the furnished on Form eight ks available the Securities and Exchange Commission website at www.sec.gov A copy of our earnings presentation is also available on the section of our website. Me today are Christian Henry, President and Chief Executive Officer and Michelle Farmer, Chief Accounting Officer. On today's call, we will make forward looking statements including among others statements regarding predictions, estimates, expectations, guidance, and the amount of the preliminary estimated non cash impairment charges you should not place undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Forms 10 Q and 10 ks and our press release to better understand the risks and uncertainties that could cause results to differ. We disclaim any obligation to update or revise these forward looking statements in excess as required by law.

We also present certain financial information on a non GAAP basis which is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results reported under U. S. GAAP Reconciliations between historical U. S. GAAP and non GAAP results are presented in our which is available on the Investors section of our website. For future periods, we are unable to reconcile non GAAP gross margin and non GAAP operating expenses without unreasonable effort due to the uncertainty regarding among other matters certain acquisition related items that may arise during the year. A recording of today's call will be available shortly after the live call in the Investors section of our website. Those electing to use the replay are cautioned that forward looking statements may differ or change materially after the completion of the live call. I'll now hand the call over to Christian. Thank you for joining us today. I'll begin by reviewing our fourth quarter and full year 2024 performance highlighting key commercial achievements and providing insights into our outlook. Then our Chief Accounting Officer, Michelle Farmer, will walk through the financials in more depth and then I'll close with our guidance and outlook for the year.

In the fourth quarter, we reported $39,200,000 in revenue, driven by the shipment of 23 REVIO SIPs Additionally, we successfully commenced shipment of our Vega Bench Tarp platform delivering seven units ahead of schedule. For the full year, revenue totaled $154,000,000 reflecting 97 revenue shipments.

Our customer base continues to expand significantly, with the ReVio platform installed at nearly 200 customers at December 31. Notably in 2024, approximately 45% of all ReVio shipments went to new PacBio instrument customers. Demonstrating strong momentum in attracting users transitioning from other Meanwhile, there remains a meaningful upgrade opportunity with approximately 125 active SQL II and 2E users in the field. Many of whom could transition to REVO four Vega in the coming years. Adoption of PacBio HiFi Long Reach sequencing continues to accelerate. Total growth in genomic data output accelerated on our platforms, with an 81% increase 2024, up from 68% growth in 2023. Highlighting broader utilization of our technology. Since 2020, total sequencing output has expanded more than 12 fold demonstrating a remarkable increase in HiFi sequencing activity. Correspondingly, consumable revenue grew 11% year over year in 2024 to 70,400,000.0 representing a 23% compound annual growth rate since 2020. Looking ahead to 2025, we anticipate that customers will continue navigate an uncertain funding environment much like in 2024. Macroeconomic pressures are expected to persist extending sales cycles, particularly for higher CapEx life science instrumentation like ReVio. Additionally, the recent announcements regarding NIH funding involving a cap on the institute's direct funding rates have increased the uncertainty in the academic environment.

Particularly in The United States. Considering these factors, we expect 2025 revenue to range between $155,000,000 and $170,000,000 representing 6% year over year growth at the midpoint and roughly in line with external growth estimates for the next generation sequencing market in 2025.

While product launches and macro factors have caused our revenue growth to fluctuate over the past few years, it's worth noting that our revenue guidance at the midpoint still reflects a 16% compound annual growth rate since 2020. And significantly outpaces the overall NGS market growth which again demonstrates the growing adoption of our technology. I'll discuss our full 2025 financial guidance in more detail later in this call. Over the medium term and as the macroeconomic environment we believe that we can achieve sustained double digit revenue growth as long range sequencing continues to expand into new genomic applications Our key priorities for driving growth include: expanding the adoption of HiFi sequencing by accelerating the uptake of the Vega Benchtop platform and enhancing the value and usability of ReVio with Spark Chemistry, Leveraging recent innovations to substantially increase sequencing throughput while reducing costs, These advances have the potential to bring long re sequencing closer to price parity with short read technologies, delivering end to end solutions focusing on clinical applications and where PacBio's HiFi technology provides unique advantages.

Like connects for RNA sequencing and PureTarget a targeted approach for sequencing difficult to sequence genes. Notably in 2024, application and extraction kit revenue grew 56% year over year, Our strategy also includes providing turnkey bioinformatics solutions so our customers can go from sample to answer without running complex data analysis pipelines. Lastly, as a result of the continued and recent macroeconomic uncertainty [indiscernible] As well as the recent NIH announcements we now anticipate turning cash flow positive exiting 2027. We remain focused on lowering our cash burn and believe our approximately $390,000,000 in cash and investments at the end of twenty twenty four we'll bridge this to becoming cash flow positive based on our current assumptions. Notably, after our note exchange in the fourth quarter, this timeframe still positions cash flow PacBio returned cash flow positive well before our first debt maturity in August of twenty twenty nine. While we faced challenges in 2024, it was a pivotal year in strengthening our business and advancing our product portfolio. We successfully launched two significant innovations, the Vega Benchtop platform and Spark Chemistry for ReVio. With the launch of Vega, PacBio offers a suite of long read sequencing systems tailored to different customer needs.

A first in the company's history. Vega features a smaller footprint lower capital cost and reduced throughput compared to revenue. Making it an accessible and versatile solution for a broad range of customers. Some of these customers include smaller academic labs focused on a range of applications that require less throughput including RNA sequencing and smaller genome. Core laboratories investigating transcriptomics and RNA biology and larger clinically focused labs utilizing HiFi sequencing for targeted panels. Early customer feedback has been strongly positive. Berry Genomics, one of our first Vega customers, reported that the platform delivers results identical to previous PacBio systems while offering notable improvements in HiFi Re deals, quality values, reduced run times, greater data processing efficiency and less hands on time. As a result, Berry Genomics plans to purchase 50 Vega units over the coming years to support its thalassemia and Fragile X assays, underscoring the platform's value in clinical application. Beyond clinical markets, Vegas versatility extends into biodiversity and environmental genomics. At the recent Plant Now More Genomics Conference, one researcher highlighted how Vegas offers a lower entry point cost increased portability and a throughput so well suited for sequencing biodiversity in remote locations. And it also noted how it will facilitate best practices in sequencing unique or difficult to access Fauna [indiscernible] Another customer from the Johns Hopkins University and Cole Spring Harbor Laboratory shared how he looks forward to using the platform for many projects spanning the entire Tree of Life from identifying new risk factors in human disease to diversifying and enriching the food supply with new crop species to understanding the microbial world beneath our very own feet.

Our funnel of sales opportunities continued to grow for the Vega platform especially with potential new customers as nearly three quarters of the customers in our sales funnel have never bought a PacBio Sequencer This demonstrates the potential reach of the platform While BIGGEST delivers versatility, the Rebeo system is our most powerful and scalable platform. In the fourth quarter, we enhanced the platform even further as we started shipping our Spark Chemistry. With Spark, the Rebio system could sequence up to 2,500 complete phase HiFi human genomes a year at a cost below $500 per genome. While significantly lowering DNA input requirements for all genome sequencing to just 500 nanograms. This represents a 75% reduction. This helped drive new customer adoption in Q4 like the J. K. Gregg vendor in which plans to use REVIO to sequence thousands of full diploid phase genomes over the next several years to find missing heritability resulting from years of SNP studies in short re sequencing fragments as part of the institute's overall goal to advance genetic testing for women's health and genetically diverse populations.

Last month at the JPMorgan Healthcare Conference, we shared a little bit more about our technology roadmap. Which is focused on improving our on market platforms and developing future platforms to expand margins and increase throughput. These programs include developing higher density smart cells which reduced the cost and increased throughput. We expect our next generation of smart cells to yield multiple times the output of today's 25M radio smart cells.

Integrating new smart cell formats that make automating our technology even easier for customers. Migrating to more advanced semiconductor inputs such as the 300 millimeter wafer instead of 200 millimeter and this can drive the cost of the SmartCell down enabling us to lower our cost to customers and expand our gross margins. Innovating on our smart cell and reagent technologies to allow customers to sequence in a smart cell more than one. Utilizing faster chemistries, which are expected to enable faster run times, and more throughput. And finally, leveraging our computational biology team and collaborations to offer more informatic capabilities across the end to end solutions to advanced bioinformatics pipeline. Feel thrilled with how Vega and Revio have changed the paradigm of highly accurate long range sequencing and were inspired by the development pathway to scale this technology even further. Over the coming years, we look forward to unveiling these to the research community which is already accelerating its pace of discovery with HiFi. Fact, PacBio Technology was cited in over 1,000 publications in preprints in 2024. In particular, are encouraged by recent publications that substantiate HiFi's ability to further our understanding of genetic and rare diseases. Like Radford University Medical Centers study analyzing 100 challenging patient cases where short re sequencing failed to identify a genetic In this study, researchers used REVEEO and detected ninety three percent of pathogenic variants.

Including complex structural variants and DNA methylation abnormality. The key takeaway here is not just HiFi's ability to improve solve rates, but its potential to replace multiple testing modalities.

As a result, Radmo is expanding its sequencing efforts to 5,000 additional samples. Further demonstrating the clinical impact of HiFi sequencing in rare disease diagnostics. A unique aspect of PacBio HiFi sequencing is its multi ohmic capability. That is, it interrogates RNA and epigenetics in addition to DNA. This multiomics approach was used in a recent study to diagnose a nine month old patient with an undiagnosed rare genetic condition. HiFi sequencing uncovered a balanced translocation between chromosomes X and 13 disrupting four key genes distinct mechanisms findings that were missed by short read sequencing. We believe these studies highlight how PacBio's advanced sequencing technology enables groundbreaking genetic discoveries providing new hope for rare disease patients worldwide. 2024, we began to see larger scale genomic testing labs hospitals and medical centers adopt HiFi with several implementing our pure target library prep kit to develop and improve carrier screening and other genetic tests. We previously disclosed laps like Marriott and Quest in The U. S. Which are developing tests on the raviosus In Europe, BioCentia uses HiFi for routine testing for certain sensory disorders. As previously mentioned, Radman University Medical Center has committed to sequencing 5,000 Hi Fi genomes in a clinical setting focused on rare disease.

With the Sequel II, Berry Genomics is in the final stages of obtaining NMPA approval for its thalassemia carrier screening test in China.

This is an important test as the prevalence of carriers of this disease represents over ten percent of the population in parts of the country. With Vega, Berry plans to expand its carrier screening test to other indications. 2024 was a pivotal year in our clinical path with nearly 15% of our revenues coming from LVT Labs, or children's hospitals. And we had even higher clinical exposure when factoring translational work at research institutes around the world. Looking back on 2024, we also took decisive actions to improve efficiency, reduce costs and lower cash burn which we believe will position us to continue to improve our financial profile on delivering our commercial and R and D initiatives. We reduced annualized non GAAP operating expenses by more than $75,000,000 aligning spending with our [indiscernible] As a result, we lowered adjusted cash burn each quarter We also made progress in taking costs out of our per unit instrument and [indiscernible] and consumable costs 1622% lower respectively, than where we started the year. And we see a pathway to further reduce per unit COGS in 2025. We successfully executed on a convertible note exchange reducing our debt by $259,000,000 and extending the maturity of our 2028 notes by eighteen months to August 2029.

Strengthening our financial flexibility. Finally, we're pleased to announce that Dave Ruggiero has joined as Global Head of Sales and David brings deep experience in sales leadership and across technology and life sciences and his expertise will be instrumental As we expand our global reach and scale our sequencing solution.

We're also delighted to share that Chris Smith has joined our Board of Directors. As CEO of NeoGenomics, Chris brings extensive expertise in the diagnostics and laboratory testing market and we look forward to his insights as we advance our clinical strategy. We thank Kevin in line for his service to our Board as he steps down and wish us the best in his future endeavors. We are also continuing our search for a new Chief Financial Officer.

We're focused on identifying a leader who will help drive our next phase of growth and champion operational efficiency throughout the organization. Now, I'll pass the call on to Michelle Farmer, to discuss our financials. [indiscernible] Thank you, Christian. I will be discussing non GAAP results which include non cash stock based compensation expense. I encourage you to review the reconciliation of GAAP to non GAAP financial measures in our earnings press release As discussed, we reported $39,200,000 in product, service and other revenue in the fourth quarter of twenty twenty four. Which represented a decrease of 33% from $58,400,000 in the fourth quarter of twenty twenty three. Instrument revenue in the fourth quarter was 15,300,000.0 a 56% decrease from $35,100,000 in the fourth quarter of twenty primarily driven by lower ReVIO We ended the quarter with 270 cumulative ReVio system shipments.

Turning to consumables, revenue of $18,800,000 in the fourth quarter was roughly flat to $18,900,000 in the fourth quarter of last year, with annualized radio pull through per system at approximately $240,000 Finally, service and other revenue was $5,100,000 in the fourth quarter compared to $4,400,000 in the fourth quarter of twenty twenty three. Driven by an increase in service contract revenue, related to revio.

From a regional perspective, Americas revenue of $20,200,000 decreased by 41% compared to the fourth quarter of twenty twenty three. As the region is most affected by academic and NIH funding uncertainty. For Asia Pacific, revenue of approximately $8,900,000 decreased 33% over the prior year with sequential growth in consumables offset by lower revenue placement. Similar to The U. S, several countries in the region also faced government funding headwinds with respect to capital expenditures. Finally, EMEA revenue of $10,100,000 decreased 9% over the prior year period, The region saw record consumables revenue in the fourth quarter, with growing Revio utilization as key projects like Estonia Biobank, Rad Food and Dubai's population sequencing programs continue to sequence at scale. Moving down the P and L, fourth quarter twenty twenty four non GAAP gross profit of $12,300,000 represented a non GAAP gross margin of 31% compared to a non GAAP gross profit of $11,100,000 dollars or 19% in the fourth quarter of last year. Non GAAP gross margin increased year over year, due in part to change charges for scrap inventory in the fourth quarter of twenty twenty three. Compared to the third quarter of twenty twenty four, gross margins and comps declined by approximately 120 basis points.

Primarily due to scrap inventory in the quarter related to a temporary decline in SmartCell manufacturing yield and lower ASPs on REVIO due to certain strategic deals in the quarter. Partially offset by per unit cost decreases in Rev instrument and consumables.

Non GAAP operating expenses were 6 CAD68.6 million in the fourth quarter of twenty twenty four, compared to $88,400,000 in the fourth quarter of twenty twenty three.

The decrease primarily reflects reduction in R and D and SG and A related to our restructuring, restructuring initiated in the second quarter of twenty twenty four. Regarding headcount, we ended the quarter with five seventy five employees, which was flat to Q3 twenty twenty four and twenty eight percent lower at the seven ninety six employees at the end of the fourth quarter of twenty twenty three.

Operating expenses in the fourth quarter included non cash share based compensation of $14,800,000 compared to $15,400,000 in the fourth quarter of last year. Non GAAP net loss was 55,300,000.0 representing $0.2 per share in the fourth quarter of twenty twenty four compared to a non GAAP net loss of 72,500,000.0 representing $0.27 per share in the fourth quarter of twenty twenty three. We ended the fourth quarter with $389,900,000.0 in unrestricted cash and investments, compared to $471,100,000 at the end of the third quarter of twenty twenty four. Cash outflow in the quarter included approximately $54,000,000 in debt [indiscernible] [indiscernible] During the quarter, we conducted an an interim goodwill and intangible asset impairment test following a sustained decline in our stock price and market capitalization. Based on the preliminary results of this analysis, we recorded non cash impairment charges totaling 90,000,000 which includes approximately $55,000,000 related to goodwill and approximately $35,000,000 associated with an in process research and development asset. The impairment was driven by macroeconomic headwinds and revised outlook on future cash flows and is excluded from our previously discussed non GAAP results.

It is important to note that these impairment charges are non cash accounting adjustments and do not impact our liquidity, operations or ability to execute on our long term strategy. I'll now return the call to Christian to discuss guidance and As discussed earlier, we expect full year 2025 revenue to between $155,000,000 and $170,000,000 At the midpoint, this represents a growth rate of approximately 6% compared to 2024. At the midpoint of our guidance range, we expect instrument revenue to grow modestly with growth in Vegas shipments offsetting a year over year decline in REVIO [indiscernible] with annual live pull through per radio system in the low to mid 200,000 range.

As a reminder, our guidance anticipates that customers will continue to navigate an uncertain funding landscape much like in 2024, and the macroeconomic environment consistent with what we've experienced over the past few quarters. When looking at guidance from a regional perspective, the change in administration has added further uncertainty to the funding environment in The Americas.

In the near term, based on our initial conversations with customers, recently announced federal funding for Evis, particularly with NIH intravial spending, have added significant uncertainty in the broader academic research community. Our guidance considers this uncertainty, especially in the near term. On a more positive note, accelerating activity in the clinical market is anticipated to offset some of those potential headwinds. For Asia Pacific, while we anticipate growth in the region in 2025, the funding dynamics in several countries continue to affect capital purchasing timelines for the REVEEO platform. Additionally, our guidance does not consider the impact of tariffs or other activity that would impact our ability to export products to the region. We expect EMEA to be the fastest growing region in 2025 as population sequencing programs scale, whole genome sequencing in the clinical setting grows, and we expand our customer base with Vega. Looking at Q1, specifically, we anticipate typical seasonality five to be lower than the fourth quarter of twenty twenty four. With Revio Systems and Consumables revenue partially offset by increased Vega System revenue.

Moving down the P and L, we expect the 2025 non GAAP gross margin to be between 3540% representing over 400 basis point improvement compared to 2024 and we expect to exit the year above 40%.

We expect to continue removing costs from the REVIO system and consumables and the Vega cost of goods sold per unit is expected to improve as the platform moves from pilot manufacturing line to the full production line. We expect non GAAP operating expenses to decline 3% to 7% compared to 2024 and be in the range of $270,000,000 to $280,000,000 reflecting in large part the annualization of our restructuring in the second quarter of twenty twenty four. Expect interest and other income to be between $5,000,000 and $7,000,000 in 2025 and the weighted average share count for EPS for the full year to be approximately $299,000,000 expect to end the year with cash and investments down to approximately $260,000,000 implying $130,000,000 cash burn in 2025 or an improvement of 57,000,000 in adjusted cash burn compared to 2024. Finally, as discussed, with our current expectation for 2025 revenue growth, we now anticipate turning cash flow positive exiting 2027 as a result of the continued and recent macroeconomic uncertainty, as well as the recent NIH announcement. We remain diligent in lowering annual cash burn and believe our approximately $390,000,000 in cash and investments will bridge us to becoming cash flow positive.

Importantly, after our note exchange in the fourth quarter, this timeframe is still positioned at PacBio to turn cash flow positive with meaningful time before our first debt maturity in August of twenty twenty nine, Looking ahead, I want to reiterate our primary objective in 2025 is to grow revenue and expand gross margins through four main activities. First is enabling the full scale release of Vega, which we expect will broaden the reach of our technology in the market and bring more new customers to HiFi sequencing Second, we aim to accelerate the number of samples on the ReVio platform. Through the launch of the Spark Chemistry and Application Kit. Revenue has the potential to drive further growth in long rate data. Third, we will continue to invest in future product launches to both amplify and diversify our offerings. I mentioned several of the exciting initiatives that we're currently working on earlier in this call. And finally, to progress our clinical strategy, to improve outcomes and create durability. With these activities, we believe we can drive growth and market expansion in 2025 while continuing to improve our financial profile. I look forward to connecting with many of you this quarter at the Annual AGBT meeting and Investor Conferences.

We will now open up the call to questions.

Today's first question comes from Tycho Peterson with Jefferies.

Hey, thanks. Kristen, I think you talked about an uncertain funding environment much like 2024. I'm going to take the other side and say it's a lot different right now. So what specifically have you baked in for NIH disruption in the near term? It sounds like you baked some of it in. Did you bake down kind of the full freeze on the 15% overhead?

Well, I think that so thanks, Tycho for the question. Of course, the funding environment is very dynamic in The United States right now. There's no question about that. But we fully contemplated some pretty significant headwinds, particularly in the first half of the year. And you saw we said in our guidance typical a bit of typical seasonality, but we expect revenues to be down in Q1 versus Q4. Partially because of that uncertainty, partially because of kind of typical seasonality And so I do think we have to the best of our ability kind of based in what could be a real challenging time into our guidance. One thing we've done, of course, since the the 15% came out over the last week is we looked at every single opportunity. I went I actually personally went to each member of the Americas sales team that have an opportunity closing this quarter to try to get an assessment of each instrument opportunity in particular. And the feedback was is still some uncertainty a lot of positivity about getting the deals done that we've but we still have to get them done. I think Tycho, one area where you one area where you may look where we've been really thoughtful here is we've lowered kind of the pull through expectation So we did $240,000 or so in Q4.

We gave a pretty broad range of low 200s to mid-200s. And that's an area where you could see some funding freezes or pauses slow activity. And so we're monitoring the situation. We think we've given a responsible guidance here. The other thing on the positive side, I'd say, is we have we're seeing very exciting growth in Europe that is offsetting some of the risk in The Americas. And we're also seeing a pretty significant expansion in the clinical side of our business which isn't funded by NIH sources, And then finally, we also see Vega really the sales funnel for Vega as we've talked about, we talked about this at JPS continues to grow. The quality of the opportunities are strong. And I think that that is That is the right product. In a situation where the capital the capital environment is tough. So hopefully that helps a little bit.

It does. And on Vega, I think at JPM, you you'd only shipped seven units because that's all you had available. Can you maybe just talk on on anything you can say on backlog and when do you expect to kind of scale up shipments more meaningfully?

Yes. So we I mean, we certainly have some backlog and we will ship over the course of the quarter We're scaling up and really what we're doing is the first half of the year we're producing on the R and D so to speak, pilot production line. And then in the second half of the year, we'll be on the full production line. So So the inventory situation or ability to deliver will improve. Each quarter here. And by the time we get into the back half of the year, I suspect we should be able to fulfill the majority of the demand Okay.

Last one, you just you pushed out cash flow breakeven by a year.

I just want to make sure I mean, I know you're guiding below consensus here, just over $20,000,000 but other levers you could pull if you need to pull that forward?

There certainly are. Look, if we obviously, if we can our focus is on driving growth and gross margin expansion, those are the those are the obvious key levers. But we certainly are focused on making sure that we're diligent with how we utilize our resources saving wherever we can. And so there are other opportunities if necessary to further reduce burn.

Thank you. And our next question today comes from Kyle Mixon with Canaccord. Please go ahead.

Hey guys, thanks for the questions. Just a follow-up on the guidance. Why are revenue shipments expected to decline this year if 24 placements were already about half of that of 23? Like why is that product fading? Is that NAC related?

Market related or just cannibalization from Pembego so far?

Is there further downside to the guidance? I know you baked in the challenges to that's your ability, but could you just try to like quantifying what's in there for NIH? Is it like $5,000,000 or so? Is it $10,000,000 or so? Just help to kind of quantify that? Thanks.

Yes. So, first of all, I would I would argue that that Vega is not significantly capitalizing Revio at all. And I would also argue that Revio is not fading at all. We are really in a in a one of the most unprecedented macroeconomic career, and in this at least in this space. And so so when we think about the challenges we're having with respect to revio and accelerating shipment volume it really is driven by funding concerns. We're seeing all over the world customers publishing more and more using iFi needing more scale. We're seeing customers extoll the virtues of HiFi Pacific as a long read platform. We're winning projects like we've won last year and it's Estonia, etcetera.

But the reality is that the macroeconomic environment is really tough.

And that continues to be an important driver for more expensive capital equipment. And so when we put our guidance out for 2025, we are considering that it's going to continue to be just as tough a macroeconomic environment may be even tougher And so that I would argue that we said we expected revenue shipments to be modestly down from 2024 levels.

They could easily they could easily turn the other way if some of the if the macroeconomic headwinds aren't as bad as we think. So that's how I would comment on Revio and Vega. With respect to the funding itself and is there further downside to the guidance I think what we've done is we've really taken our best look at the funding environment our sales funnel, our opportunities, and trying to put together guidance that we felt was very, very responsible One of the things that's working in our favor, Kyle, as I talked about before, is that Europe is actually growing really strong and is expected to grow really strong this year. And that will drive and that will help our growth. Asia Pacific, while it does have we do have country specific challenges, Vynga is a very strong platform for that part of the world. And we expect to see strong demand there for Vega. And then we talked about some of our clinical customers like Myriad and Quest and others they are scaling up and in carrier screening, and other assays, as those become routine, those are completely additive to growth. And so I think we have a lot of a lot of positive areas where we can grow.

But of course, we have this significant headwind. I think that pretty much everyone in our industry has been talking about at some level. Thanks, Kyle. Next question, Rachna.

Absolutely. Our next question comes from Dan Brennan with TD Cowen. Please go ahead. Great. Thanks. Thanks for the questions.

Just to start off, just one more on NNA, if you don't mind. So your exposure to what Christian is around 28% or somewhere in that zip code? I'm just trying to get a sense of like kind of what's baked in. Is it like a 15% cut on 28% to like four point headwind? Is there something greater than that?

Just kind of wondering like the magnitude of kind of what you've assumed Well, I think our total NH revenue is roughly 20% of revenue. [indiscernible] And I do think you can work through I do think it's difficult to to game out down to $1 I know you're looking for well it's X million dollars exactly of risk, but the reality is that it's a lot more complex than that. And I think some of our peers were helping to try to explain that [indiscernible] I think from our perspective, what we're seeing is it's really a deal by it's really a deal by deal institution by institution. Some institutions have funds their instrumentation out of different pools of money. Other institutions have the significant overrate that they're going to absolutely apply. And I think it's too early to really game out dollar by dollar So what we've done is we've taken a look at our sales funnel and taken a look at our our opportunity set particularly in The Americas, and evaluated that in its totality to try to come up with guidance for what we bought. Here's what America's going to do. Here's what Europe is going to do.

And here's what age is going to do. And that's why this year we gave a little more color region by region so that you could get some perspective that yes, it's an important part of our business, but it's not our whole business. Thanks, Dan. Have next question, Rocco. Absolutely. Our next question comes from Doug Schenkel with Wolfe Research.

Please go ahead. Hey, good afternoon, guys. I have let me just draw out I think it's two or three quick questions. Actually, I'll keep it to two. One is on gross margin, you are targeting an exit rate above percent this year. We were above consensus and your exit rate is actually higher than our estimates. So there's some sunshine on Can you talk about the progress you are making on gross margin? And how much gross margin can you get to this year if you say revenue comes in closer to where consensus was, versus where you're targeting as we start the year. So that's the first topic.

And then the second is acknowledging there's a lot of things happening outside your control In terms of what you can control, are there things that you are moving forward with as we sit here today to reduce friction to adopt of your instruments, maybe more things like reagent rental type things or other initiatives that could make it easier for customers to bring in instruments in what could be a tougher environment for capital demand.

Yes. Thank you, Doug. Those are great questions and and I appreciate the sentiment on gross margin because I do think it is an area where we're going to see significant opportunity this year. When When we what's really happening is in gross margins in Q4, we had some yield issues on which drove drove some impact to our GM Those have been largely resolved and we're on our way back. We continue to make progress in terms of lowering the per unit cost of [indiscernible] our smart cells as well as the instruments themselves. We've in sourced a lot more of our instrument manufacturing which is driving pretty substantial savings And as those instruments go into inventory and then get sold through, we'll start to see the benefit of that as well. So we do have a very strong path to exiting over 40 and actually nicely over 40 Your point about relative to prior consensus is actually an interesting [indiscernible] It's likely that gross margins would be higher if we were the more revenue we do, the more likely the gross margins are going to be higher. And the reason for that is because you're going to see a greater push of consumables, which generally carry higher gross margin.

And as that mix shift occurs, you get a substantial benefit from that. And so One of the things we were pretty thoughtful about how we thought about our consumable revenues. Which on the one side, being if they are lower on your revenue guidance that hurts your gross margin. But if you end up doing a little bit better that will help your gross margin. So those are are that's kind of giving some color on how to think about how we're going to move through the year with gross margin. And exit the year quite frankly, what we believe will be a really strong position moving into 2026, The last the other part of your question, there is a lot of stuff that we can do that try to combat combat the macroeconomic environment and And we do have programs in place. We have what we call a run revio program where you can put very little money down and and bake it in big the cost of the instrument into the reagents and can have a similar program that we launched for Vega Although most customers so far have been pretty pretty happy with the price of Vega and I do expect ASPs to be pretty strong for Vega here in the particularly in the particularly in 2025.

We'll see how 2026 goes, but I think we were off to a strong start there with respect to ASP. We're also another area where if you're thinking about how do we accelerate our business, is accelerate consumable